Author Question: Inflation targeting has been adopted by the central banks of several countries including the ... (Read 124 times)

hbsimmons88 · **on:** Jun 29, 2018

Inflation targeting has been adopted by the central banks of several countries including the European Central Bank.

Indicate whether the statement is true or false

Question 2

Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations.

The current unemployment rate = 7.
The natural rate of unemployment = 5.5.
Last year's inflation rate = 5.
This year's inflation rate = 4.

micaelaswann · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

TRUE

Answer to Question 2

If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (5). Since workers are overestimating the actual rate of inflation, real wages will be rising, leading to an unemployment rate that is above its natural level (7 > 5.5 ). As firms and workers adjust their inflation expectations, real wages will decrease until the economy reaches its natural rate of unemployment.